Q2 2016 The Big Unknown
Most investors can tell you what Ferdinand Magellan or Christopher Columbus must have been feeling as they set out on their paths of discovery. Jittery nerves, a plethora of unanswered questions, and hope. Looking back at Q2 2016, there is a resemblance to those journeys and feelings. A Fed rate hike that was a foregone conclusion that never happened and a Brexit vote that wasn't going to happen but did were among the events that left investors scratching their heads. The Dow finished the quarter with a +2.07% return and the S&P 500 also posted a return of +2.46% including dividends. The NASDAQ 100 was down losing -1.14% but the Russell 2000 finished the quarter with a +3.79% return. Value investing carried most markets as investors detoured from what worked in 2015. The Russell 1000 Value Index was up +4.58% which outperformed the Russell 1000 Growth Index which barely reached positive territory with a return of +0.61%. Returns were an enigma as non-farm payrolls gave us a roller-coaster ride in Q2. April posted 160,000 in job gains, May came in well below expectations at 38,000 jobs, and June's 287,000 gain left questions as to how the U.S. was really faring. The unemployment rate in June rose to 4.9% as more people entered the labor force. The moving average of job creation has started to trend down complicating the Fed outlook. The Fed's concern over Brexit, low inflation and uncertain employment picture were the main reasons the Fed held steady on rates at their June meeting. The USD strengthened versus many of its counterparts mainly on the unknown surrounding the Brexit vote. Immediately after the results the Sterling tumbled to a 30-year low against the USD with a single day drop of over 10%. Housing is starting to show signs of cooling. The S&P Case-Shiller Index came in at +1.1% in April versus expectations of increases in the range of +5.3% to +5.8% and pending home sales came in at -3.7% for May versus expectations in the range -2.4% to +0.1%. Across the pond, foreign markets didn't participate in the rally like the U.S. as the MSCI EAFE index was down -1.46% in the quarter and the MSCI Europe Index was down -2.69%. Emerging markets, however, were one of the better performing regions overseas returning +0.66%.
Regarding fixed income, treasury yields declined as flight-to-quality remained intact. The 10-year yield in the U.S. dropped to 1.39% and most global sovereign bonds saw yields under 1% or even into negative territory. At the time of this writing, over $11 trillion worth of global sovereign debt trades at negative yields. The ECB widened its bond buying agenda to include corporate bonds helping to accelerate the drop in yields for the region. High yield fixed income also participated in the rally with the Barclays U.S. Corporate High Yield Index returning +5.52% for the quarter and the JP Morgan Emerging Markets Bond Index returning +5.02%. Gold finished with a +6.75% gain for the second quarter leaving the metal up over 20% on the year.
2016 ASSET ALLOCATION UPDATE
As we progress through the year, TIC continues to remain ever vigilant of the markets and will continue on a path of caution. The value over growth preference we initiated at the end of 2015 has proven to reward our clients in the face of the uncertainty we see in these markets. Sticking true to our long-term vision, we held our allocation steady during the Brexit fallout with the understanding that it will take at least two years for all the new trade negotiations and regulations to take place. As we write, the market continues to climb a wall of worry with the next big obstacle facing investors seems to be the U.S. elections in November. At the end of June, the Committee voted to remove the Blackrock Global Long/Short Credit fund to start the process of extending duration. We have come to the conclusion that interest rates will remain low for an extended period of time. Those proceeds will remain in cash temporarily as we search for an alternative. We took a hard look at our international managers and recently had a conference call with Cambiar Investors in order to get their take on the Brexit situation. We decided to remain with our current weight in developed international equity at this time due to valuation reasons and favorable earnings comparisons looking forward. However, we remain underweight international on a global market capitalization basis as we feel a U.S. bias is warranted at this stage of the cycle. Lastly, we continue to avoid emerging markets directly as we feel the region remains fragile.
In hindsight, our asset allocation adjustments of less equity and more fixed income have served our clients well so far in 2016. As of quarter end, our fixed income model has outperformed this year driving overall performance for our clients. Fixed income remains a safe haven from the volatility as central bankers continue to intervene in the fixed income markets to support the fragile global growth situation. Our manager selection process prioritizes downside protection over upside capture which proved to work well this quarter. Several of our managers performed significantly better than their benchmarks on a relative basis. Listed below are composite results from some of our managers vs. their benchmarks.
|Manager||* Q2 2016 Return||Benchmark|
|Federated Strategic Value Dividend||+6.92%||+2.46% S&P 500|
|Congress Asset Management MC Growth||+3.65%||+1.56% Russell MC Growth|
|Schafer Cullen High Dividend Value||+5.60%||+4.58% Russell 1000 Value|
|Federated International Strategic Value||+4.21%||-1.46% MSCI EAFE|
*Returns are expressed as composite returns. Results may vary. Past performance is no guarantee of future returns
We look forward to speaking with all of our clients regarding our views and the performance of their respective portfolios. For additional information or questions please contact Mason Williams, Chief Investment Officer, at 786-497-1214 or Gerardo Rodriguez, Investment Officer, at 786-292-0310.